Trustee Duties With Respect to Life Insurance Policies
Irrevocable life insurance trusts (“ILITs”) are often used to keep insurance proceeds from being taxed in the estate of the insured. The insured often asks relatives or friends to serve as trustee of an ILIT, because he or she assumes that while the insured is alive the trustee is required merely to pay premiums from gifted funds and send out notices to beneficiaries of their right to a distribution from the premiums contributed. That assumption isn’t correct. If a trustee holds an insurance policy in a trust, that policy is subject to same prudent investor considerations that apply to other trust assets. What do they involve?
A trustee must evaluate trust assets within a reasonable period of time after the commencement of the trust relationship. In the context of an insurance trust, the trustee must do the following for each insurance policy contributed to the trust or to be purchased by the trust:
- Determine whether the policy is suitable, given the trust objectives;
- Evaluate the insurance company; and
- For an existing policy, determine whether the policy is performing according to expectations.
Periodically During Trust Term
Trustees have ongoing duties to monitor and evaluate trust assets. The trustee should do the following on a periodic basis for each policy held by the trust:
- Reevaluate the issuing insurance company;
- Obtain an in-force illustration and do a performance analysis;
- Analyze whether the policy continues to be suitable for the trust’s objectives;
- Consider factors that might lower premiums, like health improvements to insured; and
- Review pricing.
The foregoing is not a comprehensive list, but it sets out the essential tasks of an ILIT trustee for insurance policies held in the trust. If a trustee lacks sufficient expertise to conduct the necessary analyses—and most folks who are not a life insurance professionals will lack sufficient expertise—the trustee should hire someone with that expertise to help.